Garmin Ltd.

Good morning, ladies and gentlemen, and welcome to the Garmin Limited Fourth Quarter 2019 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a -and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Terri Seck, Manager of Investor Relations.

Good morning, everyone. We would like to welcome you to Garmin Limited's Fourth Quarter 2019 earnings call. Please note that the earnings, press release, and related slides are available at Garmin's Investor Relations site on the Internet at .garmin.com. An archive of the webcast and related transcripts will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, earnings, gross and operating margins, and future dividends, market shares, product introduction, future demand for our products and plans, and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of the risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K, filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Limited this morning are Cliff Pimble, President and Chief Executive Officer, and Doug Besson, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pimble.

Thank you, Terri, and good morning, everyone. As announced earlier today, we finished 2019 strong, with revenue for the quarter increasing 18 percent over the prior year to $1.1 billion. Fitness, aviation, marine, and outdoor collectively increased 24 percent over the prior year. Gross margin was 58 percent compared to 58.9 percent during the prior year. Operating margin improved to 25.1 percent, and operating income increased 24 percent over the prior year. These results generated GAAP EPS of $1.89 and Proforma EPS of $1.29 in the quarter, an increase of 26 percent. Looking briefly at our full year performance, 2019 was a remarkable year of accomplishments. Revenue increased 12 percent to over $3.7 billion, representing a new record for Garmin. Combined revenue from fitness, aviation, marine, and outdoor increased 18 percent. Gross margin improved to 59.5 percent. Operating margin improved to 25.2 percent, and operating income increased 21 percent to $946 million, another record achievement. This resulted in GAAP EPS of $4.99 and Proforma EPS of $4.45, an increase of 21 percent over the prior year. In light of these strong results, at our upcoming annual meeting, we'll be asking shareholders to approve an annual dividend of $2.44 a share, representing a 7 percent increase. Doug will discuss financial results in greater detail in a few minutes, but first I'd like to highlight some achievements from the past year and our outlook in each of our five business segments. 2019 was an outstanding year for our fitness segment, with each product category performing well. During the year, we launched sweeping updates to our running, wellness, and cycling product lines, and these products were strong contributors in the final quarter of the year. In addition, our recent acquisition of tax brought new revenue to the segment and expanded our ability to serve cycling customers indoors and outdoors all year long. For the year, revenue from fitness increased 22 percent, exceeding the $1 billion threshold for the first time. Gross and operating margins were 51 percent and 18 percent, respectively, and operating income increased 6 percent over the prior year. In 2020, we plan to build on this momentum by launching new feature-rich products, while also expanding the distribution of tax products. As a result, we anticipate revenue from the fitness segment will increase approximately 10 percent for the year. 2019 was an extraordinary year for our aviation segment. ADS-B was a significant contributor to growth, but on a combined basis, other categories contributed even more. We experienced growth in aftermarket systems as customers recognized the strong value proposition of modern cockpit electronics. We also experienced growth in OEM systems driven by popular new aircraft and from increasing demand for trainer aircraft. For the year, revenue from aviation increased 22 percent. Gross and operating margins were 74 percent and 34 percent, respectively, and operating income increased 24 percent over the prior year. For 2020, we anticipate that revenue from aviation will be comparable to that of 2019, as growth in aftermarket systems is offset by declining ADS-B revenues. Trends in the broader OEM market should be in line with those of 2019. We anticipate that the early part of the year will be the strongest, driven by residual ADS-B demand, followed by a weaker back half as we move past the inevitable peak of the ADS-B cycle. We are focused on opportunities that lie ahead, and we are confident in the long-term growth prospects for our aviation business. Our marine segment delivered another year of impressive results, as market growth and market share gains boosted our performance. From time to time, we've highlighted our halo products and technologies, achievements that speak for themselves and cast a positive glow across the entire Garmin brand. Our Panoptix LiveScope sonar system is one example that is generating excitement and strong sales across a broad range of products. We also introduced our first electric trolling motor, which is a new product category for us and brings game-changing new features to the market. For the year, revenue from marine increased 15%, exceeding the $500 million threshold for the first time. Growths in operating margins improved to 60% and 22% respectively, and operating income increased 73%. Looking forward, interest in our products remained very strong entering the 2020 boating season. In addition, our market share in the OEM category will grow, as some of the most respected boat brands adopt our products as standard equipment on their 2020 models. With this in mind, we anticipate revenue from the marine segment will increase approximately 10% for the year. Outdoor delivered another strong year of product achievements and revenue growth. During the year, we launched the Mark luxury watch series, and we completely refreshed the Phoenix Adventure Watch series. We also introduced versions of the Phoenix with passive solar recharging technology, which has resonated positively with the market. For the year, revenue from Outdoor increased 13%. Growths in operating margins were 65% and 36% respectively, and operating income increased 15% over the prior year. Looking ahead, we believe that the Adventure Watch category will continue to grow, driven by further innovation and new utility. We also believe that inReach will continue to grow, as more people appreciate the convenience and life-saving potential of two-way remote communication. With these things in mind, we anticipate revenue from the Outdoor segment will increase approximately 10% for the year. Our auto segment also delivered many strong achievements in 2019. We integrated the Alexa Digital Assistant into our P&D product line, and we entered a new product category with the launch of the Overlander Navigation device. At the recent Consumer Electronics Show, we announced the new Dash Cam Tandem that captures quality video both inside and outside the vehicle, regardless of lighting conditions. During the year, we also secured a significant backlog of new business as a Tier 1 supplier to the world's most respected automakers. For the year, revenue from Auto decreased 14%. Gross and operating margins improved to 47% and 10% respectively, and operating income increased 50% over the prior year. Looking ahead, we believe that the negative trends in Auto will moderate as contributions from specialty categories increase and as previously announced OEM programs contribute in the back half of the year. 2020 will also be a year of accelerated investment to support recently awarded programs. We are equipping our manufacturing facility in Olathe for Auto OEM production, and we are opening a new manufacturing facility in Europe that will be dedicated to Auto OEM production. We also plan to hire additional resources in engineering and operations to support these complex, intensive development programs. With these things in mind, we anticipate that revenue from the Auto segment will decrease 5% for the year. In summary, we are excited about the opportunities we see in every business segment. For 2020, we anticipate consolidated revenue will reach approximately $4 billion, up 6% year over year, as growth in fitness, outdoor, and marine more than offset a slight decline in the Auto segment. We anticipate that revenue in aviation will be comparable to that of 2019. We anticipate gross margin of approximately .2% and operating margin of approximately 23.5%, reflecting our plan for an increased level of investment to support long-term growth initiatives. We anticipate a full year of performance effective tax rate of approximately 10%, resulting in pro forma earnings per share of approximately $4.60. Our estimated tax rate will be favorably impacted by an intercompany transaction to migrate the ownership of our consumer intellectual property from Switzerland to the United States over the next several years. Doug will be providing more details on this in a few moments. So that concludes my remarks. Next, Doug will walk you through additional details on our financial results and outlook.

Doug? Thanks, Cliff. Good morning, everyone. Let's begin by reviewing our fourth quarter and full year plan's results. We move to comments on the balance sheet, cash flow statement, and taxes. We posted revenue of over $1.1 billion for the fourth quarter, representing an 18% increase year over year. Our gross margin was 58%, a 90 basis point decrease from the prior year. Operating expense for a percentage of sales was 32.9%, a 210 basis point decrease from the prior year. Operating income was $277 million, a 24% increase from the prior year. Operating margin was 25.1%, a 120 basis point increase from the prior year. Our gap EPS was $1.89, and the former EPS was $1.29, a 26% increase from the prior year. Looking at the full year results, we posted revenue of over $3.7 billion, representing a 12% increase year over year. Gross margin was 59.5%, a 40 basis point increase from the prior year. Operating expense for a percentage of sales was 34.3%, a 160 basis point decrease from the prior year. Operating income was $946 million, a 21% increase over the prior year. Operating margin was 25.2%, a increase of 190 basis points from the prior year. Our gap EPS was $4.99, and the former EPS was $4.45, a 21% increase from the prior year. Next, look at fourth quarter full year revenue by segment. During the fourth quarter, we achieved strong double digit growth in four of our five segments, led by the fitness segment at 34% growth, followed by the aviation and marine segments with growth of 22%, and outdoor with growth of 16%. For the full year 2019, we achieved 12% consolidated growth, double digit growth in four of our five segments. Looking next, our fourth quarter revenue and operating income. A combined basis of fitness, aviation, marine, and outdoor segments contributed 89% of total revenue in the fourth quarter 2019, compared to 84% in the prior quarter. Fitness grew from 30% to 34%, aviation grew from 17% to 18%. As you see from the charts that illustrate, our profit mixed by segment. Fitness, aviation, marine, and outdoor segments collectively delivered 99% of operating income in the fourth quarter 2019, compared to 97% in the fourth quarter 2018. All segments besides the auto segment had -over-year increases in operating income dollars. Looking next, the full year charts. For the full year, fitness, aviation, marine, and outdoor segments made up 85% total revenue, compared to 81% in 2018. All segments had -over-year increases in operating income dollars. Looking next, the operating expenses. Fourth quarter operating expenses increased by $36 million for 11%. Research and development increased $17 million -over-year due to investments in engineering resources, incremental costs associated with recent acquisitions. Our advertising expense increased approximately $8 million of the prior quarter due to higher fitness and outdoor expenses, represented .7% of sales, 20 basis point decrease compared to the prior year. S&A increased $12 million compared to the prior quarter, but decreased the percentage of sales to .5% when our basis point decreased compared to the prior year. Increase was primarily due to personnel related expenses, incremental costs associated with recent acquisitions. A few highlights on the balance sheet, cash flow statement, and dividend payments. For the end of the quarter, we cashed market securities of $2.6 billion. Accounts received will increase sequentially, -over-year, to $707 million due to strong sales in the holiday quarter. Inventory balance increased -over-year to $753 million. Increase is due to our strategy to increase days of supply to support our increasingly diversified product lines and the acquisition of tax. During the fourth quarter of 2019, we generated free cash flow of $208 million. For the full year 2019, we generated free cash flow of approximately $581 million, a $183 million decrease with the prior year due to increased working capital needs. For 2020, we expect free cash flow to be approximately $750 million, approximately $225 million of capital expenditures. We announced our plans to seek shareholder approval for an increase in our dividend beginning with a June 2020 payment. The proposal is a cash dividend of $2.44 per share or $0.61 per share per quarter. It's a 7% increase from the current quarterly dividend of $0.57 per share. For the full year 2019, we reported an income tax expense of $35 million, which includes an income tax benefit of $118 million due to the revaluation and step-up of certain Switzerland deferred tax assets as a result of the Switzerland tax reform. Excluding the $118 million income tax benefit, the full year 2019 performance effective tax rate was 15.5%, a 20-faceless point decrease in the prior year. The fiscal year 2020 performance effective tax rate expected to decrease to 10%, primarily due to the migration of intellectual property ownership from Switzerland to the United States. Taking consideration the recent major tax reform in Switzerland and the United States, the migration maintained an efficient tax structure in response to the changing global tax landscape. Migration includes an inter-company license agreement that shifts intellectual property ownership for consumer products from Switzerland to United States through royalty payments. This results in a favorable shift of income by jurisdiction, reduces our level of expense related to uncertain tax positions. At the end of the multi-year license agreement, higher percentage of income will be recognized in the United States, which includes our formal remarks. Mike, could you please open the line for Q&A?

Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Robert Spingard from Credit Suisse.

Hi, good morning.

Good morning.

Cliff, I wanted to dig into aviation just a little bit here. Now that I think you're through some of the tough compare with your guide for 20, but how do we think about the relative size of ADS-B in 19 versus 20? That's the first question. Then the second question we've been getting a lot of from investors is to what extent was ADS-B driving associated retrofit activity when aircraft were in the shop for the mandate upgrade? How do you contemplate any fade in those associated revenues looking forward?

Yes, so as we exited the year, there were approximately 118,000 airplanes that had been equipped out of a total park, if you will, of about 160,000. So ideally that would mean there's something over 40,000 aircraft that could be left to equip. We don't think that all of those will be. Some of those are probably airplanes that maybe aren't in the best shape and might be scrapped. So there's going to be some fallout from those for sure. We expect that most of the activity would take place in Q1 and some in Q2, and then the activity would tend to go down in Q3 and Q4. In terms of the retrofit activity, while it's true that ADS-B probably prompted people to come in and look at other things, as we got towards the end of the mandate, particularly most of 19, I would say shop capacity has been a real issue. So as a result, people may not have been able to do everything that they wanted to. Meanwhile, we've been introducing a lot of great new products, and these are generating a lot of interest. So we would expect that people will come back and do more. And the reality is that not everybody wants to put down the big bill for all of their retrofit needs at one time, too. So they may shop and continue to watch and then do more later. So we're optimistic about the retrofit market. We think that it still has a lot of room to grow.

So just reflecting back on what you just said, if Q1 and Q2 see a little bit of ADS-B activity, and probably at a lower rate than the quarters of 2019, is it fair to say that you're anticipating a decline of something like, I don't know, let's call it 60% or so, maybe a little more?

Yeah, we don't have guidance specific on that. I would tell you that ADS-B is not a market that goes to zero because transponders need to be replaced. There's new features, new products that are introduced. So there will always be an underlying market for ADS-B out there. And of course, new airplanes always need ADS-B. So there will be a run rate of ADS-B going forward.

Okay. And then I wanted to ask you to what extent you factored coronavirus into the guide. And that's it for me. Thank you.

Yeah. So coronavirus, I think it's still an emerging situation and the cases seem to be peaking, but we're watching that. I would say it's also early in the year. So we don't, even if there's some short-term impact, we feel like there's a lot of room to make up for that. So far, our impact has been minimal and our safety stock situation has helped us there. If the outbreak continues to go on, then of course, that would change the game for us and a lot of other people. But for now, we're optimistic that things are coming back online. Our suppliers seem to be coming back, although obviously there's a ramp-up period that we're managing through all of it.

Thank

you. Thank you.

Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your next question comes from Charlie Anderson from Doherty & Company.

Yeah. Thanks for taking my questions and congrats on Estella 2019. Thanks, Charlie. I want to start with automotive, a few things. I think number one, Q4 was a little bit lower operating income, looked like higher R&D. Was that just the startup ahead of the BMW? I was curious there. And then you did make some comments in your prepared remarks, Cliff, about production in the U.S. and then in Europe. I know you've talked about the Ford deal recently, but I wonder if there are any others to highlight that drives putting those facilities together. And then lastly, on automotive, I know P&D is kind of continuing probably to be ahead, assuming we're not basing there. So maybe just kind of curious what you're embedding in the guidance in terms of the rate of decline in the P&D business. Thanks.

Yeah. So in terms of the lower operating income in Q4, there was a mix of some one-time items there as well as increased R&D associated with non-capitalized projects. So both of those kind of came together to generally lower the overall auto operating income. The P&D side is very profitable, and so that's something we're not as worried about. We do see that the market will continue to decline in 2020, although at a moderated pace as the specialty products become a bigger part of the mix. And we also see a shift in terms of buying behaviors to the more advanced products that we offer. So that's all good news in our view. In terms of the production plan, in the U.S., we're equipping our factory here to be able to supply the BMW program that we won a few years back for North American production. And then the European investment is for the most recent BMW win that will supply the European factories for BMW.

Okay. Perfect. And then for my follow-up, with the change that you made that influences the tax rate, I'm just sort of curious how that impacts where cash is accessible to corporates for corporate purposes. I wonder if you could just sort of update us on kind of where everything stands in terms of where cash is and accessible and if there's any change there. Thanks so much.

Sure. Thanks, Charlie. So as it relates to where the cash is, it does not change that. So let me give you a little bit of a more detailed color on the transaction that we went through. So this relates to intercompany license agreements between Switzerland and the United States. And so the situation is that the United States is going to be paying a royalty payment to Switzerland for the use of certain consumer IP we have in Switzerland. So as a result of that, that lowers the amount of income recognized in the United States and increases it in Switzerland. And so as a result of that, it gets us a favorable income mix by jurisdiction during that license period. So during the license period, the situation is that a higher percentage of the income will be going to the U.S.

Great.

Thanks so much.

Thank you.

Your next question comes from Nick Todera from Longbow Research.

Thanks. Good morning, guys. And congrats on great 2019 results. Thanks, Nick. Cliff, you talked about expanding distribution of tax in 2020, and I think you're also having some additional capacity coming up online for tax specifically in 2020. In your view, can you give us some sense on how should we think about overall fitness gross margin in 2020? We'll see that in the fourth quarter, the gross margin dipped below 50% for the first time, I believe, since 2010 or before. So can you give us some color? How should we think about that?

Yeah. So the fitness gross margin definitely is influenced by product mix. And in the fourth quarter, we had a lot of products that were sold, obviously, for the holiday season, particularly promotional products. And tax itself is a product line, as we've said before, that is slightly dilutive to the overall gross margins of the segment. And so the just under 50% was obviously a result of all of that mix. We would expect that to go up and down as the year progresses, depending on the seasonality and the kind of products that we offer. And generally, we're targeting around a 50% gross margin for the segment and mid to high teens operating margin for the segment.

Okay. Got it. And, Doug, I believe you said our capex for 2020 is expected to be around $225 million, if I'm not mistaken. That's about QX an increase. Am I assuming correctly that it's mostly coming from investments on the auto side and facilities and so forth, or is there something else to that?

Yeah. So let me give you, yeah, it is at an elevated level compared to 2019. So, yeah, 2020 will be an investment year for us as it relates to capex and probably going into 2021. So what's driving that is exactly what Cliff mentioned. We're making some investments relating to our auto OEM business. So we are equipping our facility here in Olathe to handle OEM. Also, we'll be opening a European facility, manufacturing facility for OEM. Also, we are building a new manufacturing facility for Tacx in the Netherlands for that acquisition. Another piece relates to our overall Olathe facility expansion. If you remember, you know, we built a new facility for our manufacturing as well as our distribution. We're complete with that. What we're doing now is actually renovating our previous manufacturing and operation facility there. We're renovating that to increase our workspace because of increased headcount to support our R&D expansion as well as innovation. So the big drivers we have.

Yeah, I see. And last one for me, the implied guidance assumes about 100 basis points of increase in operating expenses as a percent of sales. Can you give us some color? Is it mostly coming up from higher R&D expenses or is it across the board?

Yeah, sure. So as it relates to 2020 operating expenses, give you a little bit of flavor of that by category. First on advertising. For advertising and percentage of sales, we would expect our advertising to be relatively consistent -over-year. We'll probably spend more advertising dollars, but we try to keep that in line with our sales growth. As it relates to R&D, yes, there will be increased R&D as a percentage of sales -over-year. We expect that to probably be up maybe about 100 basis points. And then as it relates to SG&A as a percentage of sales, we expect that to be up about 50 basis points or so. So what's really driving that, you know, increased operating expenses really is to support our increased revenue growth. So one of which is the situation as we talked about for OEM business. So we're making some investments there, you know, to cover increased R&D operations as well as IT for different systems there. You know, from an R&D front overall, you know, we'll continue to invest in R&D to make sure that we have innovation in our products. And lastly, I would say that there is some full year impact to some acquisitions, most notably a tax that we did in 2019. It will have the full year impact to those items. So all of the expense items as well as the caffex we talked about really just support our increased -the-line growth in the revenue.

Got it. Okay, guys. Thanks. Good luck.

Thanks, Nick.

Your next question comes from Will Power from Baird.

Hey, guys. This is Charlie Ehrlich on for Will. Thanks for taking the question. I wanted to ask about the fitness segment and the strength in the quarter. Could you talk a little bit more about what specifically drove that strength? And, you know, it's been a real standout in 2019. Looks like you're expecting another strong year in fitness next year. So how have you been able to successfully navigate the competitive environment where Apple continues to do really well as well?

I think for us the strength, Charlie, for the year and also for the quarter was really around new products. Our new venue, Vivoactive 4, product lines were very popular as well as the new running product lines that we introduced last year. We completely refreshed all of those product lines. So they did very well. And then separately we got very promotional with some of the previous generation products, which drove a lot of sales activity in the holiday quarter. In terms of just drivers around the competitive landscape, I would say that, you know, we feel like the landscape has generally narrowed a lot. Of course, Apple is a big one out there just in terms of total wearables, market share. We believe that we differentiate from Apple and others with our products. They're built specifically for active lifestyles. And we focus on all-day 24-7 wearability, long battery life, and the ability to track detailed health metrics. So we're very focused on those categories and we believe we're doing very well with our space.

Great. Yeah, I know that makes sense. And congrats on surpassing a billion dollars in revenue in that second. That's quite an accomplishment. That's it for me. Thanks, guys.

Yep.

Thank you.

Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your next question comes from Eric Woodring from Morgan Stanley.

Hey, good morning, guys. Congrats on the quarter. Just a quick procedural question here. As I think about the tax rate going forward, should we think about 10% as somewhat the normalized tax rate as this license is intact, you know, beyond 2020, basically into 2021 and out? Or how should we think about that beyond 2020?

Yeah. And then we'll

follow up.

Yeah. So as it relates to our tax rate, we do not give any detailed guidance beyond the current year. So there's a number of things that really impact that tax rate all the way from the amount of income we have, the income by segment, income by country, reserve, leases, as such. But while from a high level perspective is, you know, while we have the license agreement in place, we will see that favorable income mixed by jurisdiction. Then when we no longer have a license agreement, at that point in time, we'll have a higher percentage of our income going to U.S. So that's directionally what it is. But like I said, there's a lot of puts and takes, you know, in that tax rate. But it's something that we looked at to make sure that we do maintain as efficient of a tax structure as possible.

Perfect. That's super helpful. And then I guess if I just think about the autos business, you know, I guess what your guidance would imply and your commentary would imply that you're going to see more of a mix shift towards the OEM business away from the P&D business in 2020. And so I guess what I'm trying to get at is, is this mix shift, you know, a tailwind to gross margins, a headwind to gross margins, just would love to hear kind of the puts and takes as you think about auto gross margins in 2020. Thanks.

Yeah. So as it relates to gross margins, you're correct. In the auto segment as a total, OEM will be a higher percentage of the total. So that will be a situation where auto OEM gross margins are lower than the P&D. So that will be something that will impact and decline the total auto gross margin in 2020.

Awesome. Thank you very much,

guys. Thank you.

Your next question comes from Paul Chung from JP Morgan.

Hey, guys. Thanks for taking the question. So, you know, as we think about free cash flow for 2020, you had, you know, kind of a working cap drag. And in 19, part of that was from tax. But, you know, how should we think about, you know, 20 working cap dynamics? And then what is your kind of free cash flow guide for the year? Should we expect kind of like a bounce back in conversion this year? And then as we think about seasonality for the business, you have some, you know, aviation flow through in first half. And then, you know, a pickup in the second half in auto OEM. So a lot of moving pieces. But how should we think about kind of seasonal patterns from last year relative to last year and prior years or anything you want to call out and then have a follow-up?

Yeah, sure. So it relates to a free cash flow for 2020. You're correct. To that first start with 2019. So, yeah, 2019, we did have some significant capital, working capital needs, primarily, you know, an inventory area. You know, that situation I've briefly talked about, you know, for 2019, we basically made a strategy to increase our day supply, to increase our safety stock because of tax, mitigate the bricks and all those type of things, as well as we had increased AR just because of the increase in our sales year of year. Now turning the page to 2020, we expect our free cash flow to bounce back. Our current estimates for free cash flow for 2020 are about $750 million. So with that, we're not anticipating to have the same type of -over-year working capital needs that we had, you know, in 2019 and 2020. I should say it relates to inventory. We would expect inventory, you know, year-end inventory 2020 to increase from 2019 levels, but probably more in line with what the sales increase, not the type of step function that we have. So we'll get some benefit, you know, in 2020 relating to that situation I have in working capital. So it relates to how it falls out through the year. You know, the situation is we were building, you know, inventory throughout the year. So there'll probably be a situation where we may have a situation where we have, you know, inventory -over-year higher than, you know, just the level of sales, you know, as we get through the year in the first few quarters, but by the end of the year, hopefully it'll be in line with that as we go forward. But also, you know, CapEx plays into that also. That's partially offsetting that to increased CapEx we have, which we previously talked about. So to go back to it, you know, we're making some increased investments, you know, in there for building us for the revenue for the future.

Gotcha. And then your kind of seasonality of top line, if you could follow up on that. And then also the increase in offbacks, is that going to be pretty measured throughout the year?

Yeah. So as it relates to the top line, I'll give you some real high-level points on that. I think Cliff alluded to the situation in auto. The back half of the year, you'll see some of that increase relating to OEM. Also, I should mention the fitness side of our business relating to the acquisition of tax. So the tax was acquisition that was the first part of the second quarter. So we'll get some benefit in Q1 relating to that. So that'll kind of be the seasonality relating to revenue. And then as it relates to OPEX, you know, I said that'll be something where we started to basically, you know, build some of those operating expenses, you know, here in Q4, moving into 2020. So that'll be something that we'll see that build throughout the year.

Okay. And then last question on tax. What was the contribution in the quarter? And then, you know, as we lap it in Q2, how should we think about the kind of growth in the second half in fitness for 2020? You know, how much of that growth are you kind of baking in for expanding your distribution efforts for tax? Thank you.

Yes. So the majority of the growth that we saw in fitness was organic. Tax was less than half of the growth that we saw. And of course, we have one quarter in 2020 that we're basically comping until we comp against the acquisition of tax. So going forward, then the outlook would be for all organic growth, tax contributing to the expanded distribution. And then, of course, we anticipate a strong year for our wearable products as we had in 2019.

Okay, great. Thanks, guys.

Thank you.

I am showing no further questions at this time. I would now like to turn the conference back to Terri Seck.

Thanks, everyone. As always, Doug and I are available for calls throughout the day. We hope you have a wonderful day. Bye.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may now disconnect.